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Compensation Fundamentals

HRA-NCA Compensation and Benefits Conference
Presented by:
Theresa Lynch – Consulting Director, Rewards Practice
Mitchell Bardolf – Senior Consultant, Executive Compensation Practice

© 2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

The critical role of market pricing, salary structures and job leveling
• Compensation plays a critical role in organizations’ ongoing — and increasingly challenging —

efforts to attract, retain and motivate a talented workforce
• It is an important component of an organization’s Reward, Talent and Engagement strategy
• Compensation design and management play a vital role in aligning employee behavior with
business objectives
• Human capital costs represent a significant part of most organizations’ cost bases; they need
to spend their limited resources as effectively as possible

Market Pricing

Market pricing provides the vital
external market perspective and data
needed to develop cost-effective,
market-relevant compensation
designs and manage pay effectively

Market pricing supports a range of
pay program designs (base pay, shortterm incentives and long-term
incentives)

Salary Structures

Job Leveling

Salary structures help organizations
manage compensation by aligning
pay with the competitive
marketplace, recognizing the relative
internal value of different jobs, and
maintaining the cost-effectiveness of
pay programs

Job leveling creates a common
language across the organization for
describing job requirements and
performance expectations and
facilitates the development and
communication of career paths
through the organization

They provide a framework for
rewarding performance, making
consistent pay decisions, and linking
career paths and pay opportunities,
and can provide a framework for
total rewards design and delivery

It also provides consistent alignment
of reward and talent management
programs (e.g., workforce planning,
succession planning) and helps
facilitate the integration of new
organizations and other
organizational structure changes
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Top attraction drivers: Employers largely understand the top
reasons employees choose to join an organization

But there is a disconnect on the importance of job security.

Sources: 2014 Towers Watson Global Workforce Study and 2014 Towers Watson Global Talent Management and Rewards Study
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Top retention drivers: The employer and employee view is similar,
but with important gaps

As with attraction, employers underestimate the importance
of job security; and miss the criticality of trust and confidence
in senior leadership.
Sources: 2014 Towers Watson Global Workforce Study and 2014 Towers Watson Global Talent Management and Rewards Study
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Market Pricing

Market pricing overview
• Market pricing provides information to support decisions about “how
much” and “how to” pay
• The goal is to keep the organization from:

• Underpaying, and losing talent to competitors, or being unable to attract the

talent it needs
Overpaying, and wasting organizational resources or impeding desirable turnover

• Market pricing is a descriptive, not a prescriptive activity. Market data are
not “the answer” — there’s often more to the story
• It’s an imperfect way to make sense of incomplete data

• The secret is the ability to spot the imperfections and either eliminate them or
work around them

• A combination of “art” and “science”

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Why do we market price?
• Market pricing helps organizations understand the influence of supply and
demand on the cost of labor

• Where is the market shifting, how quickly, and by how much?
• How competitive is our pay? Are our attraction and retention issues a
result of pay or something else?
Talent Readily Available

Limited Available Talent

$

$$$$

Reduced Labor Cost

Increased Cost
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Why do we market price? (cont.)
• It provides organizations with data for informed decision making:
• How should we allocate resources?
• How well are we delivering against our compensation philosophy?* Can
we afford to bridge gaps between where we are now and our target
competitive position?
• Is the way we deliver pay consistent with the mix other companies
deliver?
• What do market practices suggest for ongoing compensation
management?
• It’s essential to developing market-based reward programs
• Based on detailed understanding of business and HR objectives
• Anchored in a company’s HR strategy
*An organization’s compensation philosophy articulates the vision, mission and values that inform
the way the organization designs and manages its compensation programs. It also directly informs
the requirements for market data and the way we go about market pricing.
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Market pricing:

One of the many supporting elements of all pay decisions
Performance Information

Informal/Formal
Individual/Team/Business
Unit/Organization

Compensation Information

External

Surveys and other analyses

Recruiting feedback

Trends and prospective changes

Final Pay
Decision

Communicate
with Employee

Internal equity

Incumbent’s Current Pay Levels
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The limitations of market pricing
• Numbers imply a precision that is not necessarily accurate
• Only as valid as the salary survey data being referenced
• Data not always available in sufficient detail — especially for narrowly
defined talent markets or small/developing countries

• Published compensation surveys do not have every position, and often do
not include “hot skills” roles

• Cannot provide insights into value of non-benchmark jobs
• May cloud the organization’s judgment about taking internal equity into
account

• Cannot be the only input for making individual pay decisions
• Cannot replace business rationale and sound decision making
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Market pricing process
Step 1
Select jobs to be
market priced and
gather job content
documentation

Step 2
Determine/confirm
relevant talent
market(s)

• Identifying the
• Determine

relevant talent
benchmark jobs. A
market for
benchmark job is a
benchmark jobs may
position you can
influence target
match to a survey
market position
job. They serve as
anchor points
• A talent market is
where you
• Definite job
compete for,
responsibilities/
recruit and lose
scope
employees
• Understand job

• Keep in mind target
duties and
markets vary on:
responsibilities to
ensure good
• Competitors
matches

• Size
• Job titles are
helpful indicators, • Geography
but often
• Talent market
camouflage
definitions will
organizationinform which data •
specific variations
to gather and
whether any
differentials will
need to be applied
to survey data

• Define relevant
survey scope cuts
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Step 3

Step 4

Step 5

Step 6

Identify data
sources

Match positions Gather and interpret Adjust and finalize
and validate with compensation data
market rates
client

Sources of
compensation data:

• Match your jobs
to survey jobs

• Published surveys

• Match jobs based
on job content, not
title

• Custom cuts of
published surveys
• Custom surveys
• Club surveys
• Internet sites
Select survey
sources, different
sources are right for
different analyses
Compare your
selected surveys to
each other to ensure
elements are
compatible
Refresh your
knowledge of the
surveys and review
the surveys for
changes
Review regulatory/
contractual
requirements

• Identify cases
where premiums
or discounts may
be appropriate

• Gather
compensation data
• Know what data
you’re going to
need to pull, so
you pull the right
data the first time
• Keep in mind pay
element
considerations,
there are a myriad of
different tax and
accounting
regulations in each
country that impact
how pay is provided

• Adjust raw market
data
• Age the data
• Select the data to be
included in the
market rate
• Weight the data to
develop the final
market rate
• Ensure that your
sample size is
sufficient
• Review scope and
weightings
• Apply differentials

• Keep in mind pay
elements by region

• Apply premiums or
discounts

• Understand your
data and how it will
be used

• Consider compound
adjustments
• Address nonbenchmark positions

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Salary Structures

The development of a new pay structure is about deciding the
trade-offs in three areas
Market Relativity

Internal Equity

New Pay
Structure

Individual Contribution

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Key factors to consider in range design
• People orientation, need for cost management compared to flexibility to
reward for performance for roles that create value in the organization

• Market orientation, whether closely aligned to market pay rates, or with an
emphasis on internal equity

• Approach to pay progression
• Organization design and culture, especially the role of hierarchy – emphasis
on horizontal vs. vertical movement

• Availability of market data
• Complexity
• Ability of organization to effectively manage pay i.e., need for stronger
structural control of pay

• Other cultural factors e.g., ‘segmentation vs. one business’
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How the prevalent models compare
Narrow
Grades

Wide
Grades

Broad Bands

Many narrow pay grades

Fewer pay grades

A few wide pay bands used to manage
both career growth and pay

Range Design
Description

4

Typical Range
Width

2

Midpoint
Differential

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Max of
Level #1

1

1
100% +

60 - 80%

30% - 50%

Approximate #
of Grades

2

3
1

2

3

5

Min of
Level #1
20 – 30

12 – 15

5–8

10% – 15%

20% – 35%

No Midpoints

Used as control points

Referenced less frequently,
more typical to reference
“thirds” or “quartiles” within
the range

May use data points or zones
within bands as “market
anchors”
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How do we pick which type of structure to use?
• A salary structure should reflect an organization’s structure and management values
• One key question is how much the organization emphasizes managing its people vs.
managing its costs

Traditional/Narrow/Thin grade

Companies with this type of
organization structure…






Broad band

Hierarchical
Multiple layers
Many jobs/titles
Finite distinctions between
grades/bands

…and these management
values…

Flatter organization
Fewer levels/layers
Fewer jobs/titles



Centralized control
Focus on jobs more than
individual employees
Focus on promotion vs. career
growth
Internal equity
Greater emphasis on
managing labor costs
Decentralized control with greater
emphasis on line manager
accountability
Person based
Focus on career growth vs.
promotion
Externally focused
Flexible

…tend to use this approach
to base salary





Analysis-heavy job evaluation
models
Multiple, narrower grades/ranges
Pay is an administrative function

Competency-based plans
Fewer, broader grades/bands
Flexible salary increase guidelines
Pay is a strategic lever used to
drive business objectives and
reinforce cultural norms

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Structure development process
Step 1
Organize jobs into
levels or grades
• Assignment of jobs to levels
typically reflects an
organization’s philosophy
about the relative importance
of internal value relative to
external market value. Level
assignments can vary
significantly depending on the
approach
• Focus on internal value
• Focus on competitive
market
• There is no single correct
number of levels

Step 2
Review market rates
for benchmark jobs

Step 3
Determine range
midpoints and midpoint
progressions

• When designing a market- • The midpoint of a salary range
should approximate the market
based structure, it is
rates for the jobs in that level at
important to understand
the organization’s targeted
both how market rates vary
competitive position and reflect
within a given level and
the pay target for a fully
how market rates progress
competent employee performing
from level-to-level
at a satisfactory level
• It is important to identify
• Review the average and median
any job families for which
market rates for all positions in a
the market rates are
given level (excluding any outliers)
consistently, significantly
and determine a preliminary
higher or lower than those
midpoint for each level in the
of the majority of jobs
structure

Step 4
Determine range
spreads
• Range spreads will vary
depending on the structure
chosen, the objectives they are
intended to support (e.g., career
paths, promotions, etc.) and the
types of positions in a level

• Key factors influencing range
spreads:
• Midpoint progression
• Market range for benchmark
jobs in each level
• People orientation
• Market orientation
• Degree of “prescriptive-ness”
• Review the progression of
• Organization design and
preliminary midpoints from level
culture
to level. Midpoint progressions
• Complexity
should generally be consistent
• Global consistency vs. local
from level to level or increase with
market practices
increasing seniority
• Role of base pay in total
rewards portfolio and EVP
• Revise preliminary midpoints as
necessary to obtain a smooth
progression from level to level
through the structure

Step 5
Calculate overlap
between ranges
• Range overlap is a measure
of the difference in value of
positions in adjoining grades
• Often driven by market data
and midpoint progressions –
slope of pay opportunity
• Degree of overlap can
impact employee
motivation to seek
promotions, training and
growth opportunities (how
appropriate or not an
overlap is depends on the
role type , the local country
context and legislative
environment)
• Formula:
100 x (max of lower grade min of higher grade)
(max of lower grade - min of
lower grade)
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The position of an employee’s salary in a range is typically
correlated with skills, performance, and experience
• Many organizations define expectations about the skills, performance, and

experience associated with pay at different positions within a single salary range
These expectations provide context for goal-setting, performance management
and pay decisions
For example, the table below shows how an organization might map a position in
range to performance and skill development

Employee
Stage

Employee
Attributes

INVESTMENT

ASSET

New Entrant/Newly Promoted

Skilled

Highly Skilled

Uniquely Skilled

Minimal Experience

Experienced

Highly Experienced

Expert

Performs Most Job Requirements

Performs All Job Requirements

Performs All Job Requirements

Performs All Job Requirements

Developing Skills

Emergent High-Level Skills

Developed High-Level Skills

Consistent Application of High-Level
Skills

Unknown/Satisfactory Performance

Satisfactory/Good Performance

Strong Performance

Sustained Strong Performance

Low Market Demand for Skills

Moderate Market Demand for Skills

Moderate Market Demand for Skills

High Market Demand for Skills

Quartile 1

Salary
Range
Min

INTELLECTUAL CAPITAL

Quartile 2

Quartile 3

Quartile 4

Salary
Range
Max

Midpoint
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Range penetration and compa-ratios show how an employee’s
pay progresses with increasing skill and performance
• As employees’ mastery of their roles increase, their salaries progress

through the salary range
• Range Penetration describes how far into a range an individual’s pay has
progressed, allowing easy comparison with a rubric such as the example on
the preceding page
Formula:

Range Penetration = (pay – range minimum) / (maximum – minimum)

• Compa-ratios express the relationship between base salary and the
midpoint of a pay range

Calculated for individuals, groups of individuals or the entire organization

Typically not used in broad band structures
Formula:

Compa-ratio = pay / pay range midpoint

• In market-based narrow or wide grade structures, range midpoints

represent the competitive market. Position in range thus also provides
insight into the competitiveness of an employee’s pay

Especially helpful as a proxy for competitiveness of pay for employees in non-benchmark
positions

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Job Leveling

A Rewards and Career Framework supports a range of business
drivers
Business Drivers
 Nimble change and growth
strategy
 Attraction and retention of
key talent/pivotal roles

Rewards and Career Framework
 Tied to business strategy and internal values
 Creates a common language across the
organization

 Rapid, global expansion

 Provides a basis for describing job requirements
and performance expectations

 Employee value proposition
alignment

 Facilitates the development and communication of
career paths through the organization

 Cost management

 Links to external market surveys

 Unified talent development
and deployment process

 Provides consistent alignment of reward and talent
management programs (e.g., workforce planning,
succession planning)

 Merger and acquisition
integration

 Facilitates integration of new organizations and
other organizational structure changes

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Towers Watson’s Reward and Career Framework
Supporting the Employee Life Cycle
Workforce Analytics
& Planning

Development and
Career Management

Staffing & Selection

Performance
Management

Compensation &
Benefits

Succession
Management

Competency Model
Reward and Career Architecture

Job Leveling
A systematic process of determining the
relative value of jobs in an organization
Job Family Architecture
The infrastructure for organizing jobs
(job codes, job titles, functions, disciplines)

Inputs
Business Context

Reward and
Talent Strategy

Job Content

Employee Data

Market Data

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Rewards and Career Architecture Solutions use a common set of
bands and levels
Management Role

Executive
VP

SVP

EVP

CEO

Management
Supv

Mgr

Sr Mgr

Grp Mgr

Sr Grp Mgr

Professional/Expert

Individual Contributor Role

Entry

Intermed

Career

Specialist

Master

Expert

Technical Support
Entry

Intermed

Senior

Lead

Business Support
Entry

Intermed

Senior

Lead

Supv

Production
Entry

Intermed

Senior

Lead

The architecture serves as a foundation for organizing jobs and clarifying career paths
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Approaches to Global Compensation Design:
Global Job Architecture and Leveling

• A global job architecture and leveling protocol is the foundation for
efficient global reward and talent management

• It provides a mechanism for allocating reward investments in support of an
organization’s total rewards strategy

• Global leveling provides transparency and a common organizational
language, which are key to:
• Ensuring internal equity: which roles are comparable?
• Career and competency development: what do career paths look like?
• Talent mobility and succession planning: where does key talent reside, and what
opportunities are available across the organization?

• Understanding the staffing model: what are the implications for job design, span of control,
and responding to changing business processes?

• Workforce planning: what kind of talent will the organization need, and where should it
focus its recruiting and development efforts?

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Job Leveling Overview:

The Towers Watson Point of View

• Job leveling is…
• A systematic process of determining the relative value of jobs in an organization
• A system for analyzing and comparing different jobs according to the overall responsibilities
and scope of each job

• It is not concerned with the volume of work, or with the person doing it, or with current pay

• Purpose
• Establish a framework for:


Defining jobs and hierarchy
Providing a foundation for reward and talent management decisions including base pay, incentives,
career management, workforce planning, learning and development
Creating a flexible, adaptable means of communicating career paths and facilitating talent mobility

• Goal
• A consistent, internally relevant and market-supported approach that can be understood by
everyone involved

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Integrated Rewards and Career Framework:
Sample Pay Delivery Model

Management Role

Global Grading Job Level
Executive
VP

SVP

EVP

Long-term
Incentive
Eligible

Management
Supv

Mgr

Sr Mgr

Grp Mgr

CEO

Sr Grp Mgr

Individual Contributor Role

Professional/Expert
Entry

STI Target

Career

Specialist

Master

Annual
Incentive
Eligible

Expert

Business Support
Entry

Intermed

Senior

Lead

Supv

Spot Award
Eligible

Production
Entry

Salary Grade

Intermed

Intermed

Senior

Lead

Low

High
10%

10%

10%

15%

20%

20%

25%

30%

40%

LTI Target

30%

35%

40%

50%

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Integrated Rewards and Career Framework:

Using Leveling results to develop a Global Salary Structure

Local Market
Data

Common Leveling
Framework

Local Market
Data

£125k

£95,000 – £150,000

$155k

£102k

£85,000 – £125,000

$120k

£85k

£60,000 – £100,000

£65k

£40,000 – £80,000

$125,000 – $225,000

$180k

$100,000 – $200,000
$85,000 – $175,000

Individual
Contributor

Manager

$60,000 – $115,000

$95k

$40,000 – $85,000

$60k

£35k

£22,000 – £52,000

$25,000 – $50,000

$35k

£15k

£18,000 – £32,000

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Integrated Rewards and Career Framework:

Individual Contributor Role

Rationalizing Job Levels and Titles

Professional/Expert
Career
Specialist

Entry

Intermed

Before

Accountant 1

Accountant 2

Sr. Accountant

Staff Accountant

Before

Jr. Accountant

Accountant 3

Accountant 3

Accounting 4

Before

Account Jr.

Accountant

Mgr. Accounting

Accountant Mgr

Before

Sr. Accounting

After

Associate
Accountant

Master

Expert

Sr. Staff Accountant Principal Accountant
Accounting
Coordinator

Accounting Mgr

Principal Accountant

Sr. Principal
Accountant

Spec Acct

Sr. Associate
Accountant

Accountant

Sr. Accountant

The framework serves as a foundation for rationalizing jobs and titles
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Approaches to Global Compensation Design:
Process for Implementing a New Program
Step 1:
Project Initiation &
Framework Design
• Establish project
teams and
governance
• Detailed project
planning
• Define roadmap,
milestones and
success metrics
• Define job
architecture and
framework

Step 2:
Assign all jobs to the
framework
• Hold job leveling
workshops using a
common leveling
methodology

Step 3:
Assign
employees to jobs
• Map employees to
new titles and levels

• Develop level structure
• Review and calibrate job
levels/structures across
businesses with HR and
senior management

• Review by HR
generalists and line
managers

Step 4:
Design compensation
structure
• Market analysis
• Develop salary ranges
• Establish short- and longterm incentive targets
• Cost and impact analysis
• Senior executive review
of recommendations
• Compensation
management policies

Step 5:
Implementation
• Implementation
plan
• HR training
• Manager training
• Employee
communication
• Ongoing
measurement

Project Management, Change Management and Communication
Data Management and Technology

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Questions?

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Contact Information
Theresa Lynch
Consulting Director
Towers Watson
901 N. Glebe Rd.
Arlington, VA 22203
theresa.lynch@towerswatson.com
(703) 258 - 8216

Mitch Bardolf
Senior Consultant
Towers Watson
901 N. Glebe Rd.
Arlington, VA 22203
mitchell.bardolf@towerswatson.com
(703) 258 - 8111

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